The impacts on hospital costs between 1980 and 1984 of hospital rate regulation, competition, and changes in health insurance coverage.

In this paper, we report the results of an analysis of hospital expenses in 43 large SMSAs between 1980 and 1984. We found that hospital rate regulation--specifically Medicare's TEFRA and PPS and state multi-payer systems--was the single most important factor leading to the slowdown in the rate of increase in hospital costs between 1980 and 1984. In 1984, hospital costs covered by Medicare's PPS were 12.5% lower than they would have been in the absence of rate regulation, and in the four states covered by all-payer rate regulation, hospital costs were between 11% and 15% lower. In contrast, changes in the proportion of people either covered by employer-group health insurance or enrolled in HMOs, reduced hospital costs by less than 1%. Measures of competition suggest that hospital costs are higher where there is more competition. We also found that almost all of the effect of regulation on costs came from gains in the efficiency of producing hospital care and/or from reductions in the quality of care. It appears that controlling hospital payment rates gave hospitals a strong incentive to provide care at lower cost.